State Street Plunges

It looks like State Street (STT) investors hit the panic button this morning, with a million shares trading hands and the price dropping by as much as 27 per cent in the first hour of morning trading. There’s been no news on State Street but it is suffering far worse than many other financial firms this morning.

So what’s up with State Street? This morning recalls the frenzied selling on September 18th, which saw State Street drop by as much as 55 per cent. The biggest concern traders cite is State Street’s $28.4 billion “conduit,” which is what Wall Street has been calling special purpose vehicles which hide off-balance sheet and hold long term debt while issuing commercial paper. The long-term debt serves as collateral for the commercial paper, and reportedly consists of so-called “triple-A rated securities” backed by mortgages, auto and student loans and credit card receivables. With the commercial paper market in danger of freezing and investors sceptical of all sorts of debt backed securities regardless of ratings, State Street could be forced to take the conduit on balance sheet. This would trigger losses and most likely require another round of capital raising to meet capital requirements.

In early June, State Street raised $2.8 billion in capital. But since then equity holders in banks such as Washington Mutual and Wachovia have all but been wiped out, which could make investors shy away from injecting new capital into a bank. Many hedge funds have begun scoring the relative risks of equity and bonds in ways that make financial company equity even less attractive than it was over the summer.

We’ve heard that there is some unspecified rumour going around on State Street but no one could tell us what it was. Some traders say today’s plunge is just a sign of broader market panic, unrelated to any specific concerns at all.

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